Three essays on arbitrage in expectations.

摘要

The first essay tests a present value model in which investors revise daily their forecasts of the stochastic forward discount rates. Time-varying market risk premia are assumed to be proportional to conditional market volatilities. I test whether investors use forecasting heuristics similar to the ones proposed in recent behavioral models. The implied volatility from index options is used as a proxy for conditional short-term market volatility. I find that revisions in heuristic forecasts of volatility can explain up to 52% of the variance of contemporaneous excess returns and are consistent with an extrapolating heuristic. The second essay develops an equilibrium model of merger arbitrage where deal spreads are determined by the arbitrageurs who absorb supply shocks in the target stocks. The main prediction of the model is that deal spreads vary with merger activity depending on the elasticity of the arbitrage capital. I test the model's prediction and I find empirical evidence of a negative relationship between spreads and merger activity in the 1992–1998 period. The results support the conclusion that the supply of arbitrage capital is inelastic. The third essay tests a Wall Street investment strategy known as “pairs trading” with daily data over the period 1962–1997. Stocks are matched into pairs according to minimum distance in historical normalized price space. We test the profitability of several trading rules with six-month trading periods over the 1962–1997 period, and find average annualized excess returns of up to 12 percent for a number of self-financing portfolios of top pairs.